Growing Demand In Demand Response

While the supply side of green energy gets all the attention, those companies focusing on energy efficiency may be the slam dunk. Former Wall Street darlings like Broadwind Energy (Nasdaq:BWEN) sank nearly 71% in 2010 as the smart money in green technology investing shifted from the supply side of the equation to the demand side. Electricity generation capacity is expected to increase by 12% over the next decade in the United States. However, estimates by The North American Reliability Corporation show that demand is set to rise by about 19% in the same time frame. This supply/demand imbalance will be a boon for those companies that manage energy or promote conservation techniques.

Smoothing-Out Supply and Demand One component to the smart grid and smoothing out the supply/demand imbalance is the technique of demand response (DR). At its core, demand resp­onse programs allow residential, commercial and industrial users the abi­lity to voluntarily trim electricity usage at specific times. This can be during peak hours with high electricity prices, or during various emergencies including preventing blackout conditions. New advances in smart grid applications and technology will improve the ability of producers and consumers to communicate with each other and make decisions about when and how to produce and consume electricity. The next step in DR would be to add systems automation to the mix. In exchange for various incentives, consumers would allow the utility to automatically turn down or off certain appliances or change the degree settings on HVAC (Heating, Ventilating, and Air Conditioning) units.

A recent study by the Federal Energy Regulatory Commission (FERC) estimated that various demand response services and technologies could reduce peak energy use by 20% by 2019. The technology is already being used as an auxiliary service in some utility markets as a backup service. When a drop in production occurs due to the wind dying down or a transmission line snaps in a storm, DR kicks in. But due to regulatory concerns and payment structures, demand response has not yet reached its full potential. However, that could change with a recent ruling.

The Demand Response sector recently received a favorable ruling by FERC that could potentially change the future landscape of wholesale energy generation. The new rule requires organized wholesale energy market operators to pay demand response resources the market price for energy. This new policy helps put negawatts on the same footing as generating assets and helps give prominence to DR as a piece of the nation's energy mix.

Adding Those NegawattsWith the recent FERC ruling and the increase in worldwide energy requirements, demand response will continue to gain in popularity with utilities and consumers. With the field in its infancy, investors have the opportunity to get in on the ground floor. Funds like the First Trust Nasdaq Clean Edge Smart Grid Infrastructure (Nasdaq:GRID) or smart meter makers like Itron (Nasdaq:ITRI) allow long term investors to tap into the growth of the new electrical grid required to bring DR into the mainstream. However, despite being in its first phases, there are plenty of demand response companies to choose from.

As the major sector leader, EnerNOC (Nasdaq:ENOC) provides demand response and energy management services to a variety of grid operators, utilities, and commercial power consumers. The company recently made its tenth acquisition, purchasing M2M Communications, allowing it to enter the automated demand response market in the agricultural sector. Given the favorable FERC ruling, now may be a good time to buy EnerNOC's shares. Smaller rival Comverge (Nasdaq:COMV) can also be used as play.

Will the market for demand response growing, some major conglomerates are seeing the profit potential. Energy efficiency leader Johnson Controls (NYSE:JCI) recently acquired demand response software company Energy Connect (OTCBB:ECNG), and Honeywell (NYSE:HON) was selected by China's State Grid authority to oversee the feasibility of DR in China. Even Mr. Softy is getting in on the act. Microsoft (Nasdaq:MSFT) has announced plans to get into the demand response software game with its Hohm platform.

Bottom Line While the supply side of alternative energy gets all the attention from the press, the smart money has been quietly moving into energy efficiency measures. With the recent FERC ruling on pricing and payments, demand response is poised to grow even more in the United States and abroad. Investors with long enough timelines should consider companies in the sector like Digi International (NYSE:DGII).(As investors become more environmentally conscious, the exchange-traded fund market is following. Check out Going Green With Exchange-Traded Funds.)